What Are Earnings?

Earnings refers to the overall profits of a company. Earnings per share (EPS) is the ratio of sales price to revenue per share. Earnings ratio is the exact value obtained by dividing sales price per share by the Company’s Earnings Per Share (EPS). The higher the earnings of the company, the higher its EPS will be. This means that the ratio of the company’s earnings to the price of its stock is the better the market perception of the company.

Earnings per share (EPS) measures the earnings of the company without considering the effect of dividends and capital gains. Many more technical terms are often used for the calculation of retained earnings, EBIT, and EBITDA. All these terms mean “earnings before interest and tax” and they are calculated as a percentage of net profits after Interest and Tax charges have been deducted.

It is important to keep in mind that gross profits are reported under the statement of earnings and not EBIT or EBITDA because most companies use EBITDA in their profit and loss analysis. In general, the higher the gross profit percentage, the better the market perception of the company. Market perception is influenced by many things such as the price to earnings (PE), the dividend yield and the beta. Companies’ management team plays a significant role in the determination of these factors because they use the information provided in the balance sheet as well as the profit margin to set the stock price. It is true that the stock price is affected by the news and events related to the company, but the quality of the earnings reported does affect the price of the stock. Therefore, you can expect the price of the stock to increase if the management is saying that the company is on the verge of great success and the earnings per share (EPS) is significantly higher than the rest of the stock in the same category.